NEWS October 4, 1994 FCC CHAIRMAN REED E. HUNDT URGES CONTINUED EFFORTS TOWARD COMPETITION IN ALL TELECOMMUNICATIONS MARKETS FCC Chairman Reed E. Hundt addressed the Eighth Annual Interface sponsored by Broadcasting & Cable, the FCBA, and the Hollywood Radio & Television Society. He began "I know you are all disappointed about the demise of the telecommunications legislation. There are more explanations being offered than there are people who need to be explaining." "The truth is that many businesses represented in the three locations virtually present at this conference worked hard to pass a bill that would make a clear, irrevocable commitment to competition. The Administration also was fully behind the effort.... I personally hoped that today I'd be getting a ceremonial signing pen from the President. And I hoped that tomorrow someone in this country would get a good, new job that was created because the 1934 Communications Act had been rewritten to be a powerful mandate for competition." However, the Chairman noted that "None of us should settle for this ending....The opportunity is to commit to competition. Competition in communication is too important for us to let gridlock deny it to our entrepreneurs, to our established businesses who are looking for new markets, to our consumers, or to the people who will be looking for jobs in these new competitive ventures." The Chairman talked about the crossroads. Either we move toward competition or we strengthen monopolies. When talking about monopolies, he said "Those of you who would follow this path -- explicitly or implicitly, intentionally or unwittingly, conditionally or positively -- will have to recognize that consumers buying from monopolies will demand regulation of cable and telephone rates. This would lead to a lifetime of regulation for everyone here and our children....And, oh, all those who have new ideas to introduce into the communications revolution would have just a few companies to go to for access to the market. If those few don't like the new ideas, you'll be out of luck." Hundt continued, "I think all of you prefer the road to competition. So the first thing we must do is clear: we should all encourage Congress to act again next year. Everyone in this town is talking about the elections. I say, no matter who wins which elections, it is imperative to support the recommencement of the legislative process." -FCC- BROADCASTING & CABLE INTERFACE SPEECH BY REED E. HUNDT CHAIRMAN FEDERAL COMMUNICATIONS COMMISSION OCTOBER 4, 1994 Thank you, Dick, for that kind introduction. I have followed Dick in more than one respect and I consider it an honor. Thanks also to Don West, Broadcasting & Cable, the Federal Communications Bar Association, and the Hollywood Radio & Television Society for sponsoring the Eighth Annual Interface, and for inviting me to be with you today. I know you are all disappointed about the demise of the telecommunications legislation. There are more explanations being offered than there are people who need to be explaining. The truth is that many businesses represented in the three locations virtually present at this conference worked hard to pass a bill that would make a clear, irrevocable commitment to competition in communications markets. The Administration also was fully behind the effort. And I know that no one worked harder than the Congressional leaders Chairmen Dingell, Brooks, and Markey, Congressman Fields, Senators Hollings, Danforth and others. Similarly, we at the Commission were hoping that we were on a legislative train called the Rose Garden Special. I personally hoped that today I'd be getting a ceremonial signing pen from the President. And I hoped that tomorrow someone in this country would get a good, new job that was created because the 1934 Communications Act at last had been rewritten to create a powerful mandate for competition. Now I know many of you hired many, many lawyers and lobbyists not to defeat reform, but to pass a good bill. Worse, now that the reform effort has failed, they still expect to be paid. But as your agents and operatives probably reported to you throughout, you actually made great progress. A reform bill passed the House by 423 to 4. Another reform bill passed the Senate Commerce Committee 18 to 2. Votes like these are typically reserved for resolutions endorsing National Country Music Month or National Tooth Decay Prevention Week. Last week, a reporter asked me how I felt about the bill's demise. I said it felt like watching a remake of High Noon -- except that Gary Cooper got shot. The next day, a representative of a Bell company told me "No -- it's like The Fugitive -- except we're cast as Dr. Kimble and they never catch the one-armed man." And a cable executive countered with "No -- it's as if George Lucas made The Empire Strikes Back -- but forgot to make Revenge of the Jedi." Finally a Hollywood executive who watched the whole legislative process said -- "Next year, cut by two-thirds and rework the sound." No matter which comment appeals to you, the truth is the same --- it was not a Hollywood happy ending. None of us should settle for this ending and all of us should try to get reform in the Rose Garden next year. We need what the reform legislation would have given us -- as Chairman Markey said, we have "an historic opportunity to create an economic foundation for our country well into the next century." The opportunity is to commit to competition. Competition in communication is too important for us to let gridlock deny it to our entrepreneurs, to our established businesses who are looking for new markets, to our consumers, or to the people who will be looking for jobs in these new competitive ventures. At this moment of reconsidering what is to be done, I'd like to invoke the words of a famous man by the last name of Allen, Woody, not Bob. This is what he wrote; "More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly." The crossroads that I see is this. Either we move toward competition or we strengthen monopolies. As Yogi Berra once said, "when you come to a fork in the road, take it." I wish it were just that simple. But the reality is that the path to competition is possible for everyone. Industry, finance, and technology all make competition potentially possible in every market. The barriers to entry are primarily regulation and the market dominance of incumbents, not proprietary rights or the lack of capital. Now there is another fork -- one not labelled "To competition". The truth is we don't necessarily have to adopt a policy of competition. Many other countries have not done so. But if we don't, let's be honest about it and agree to a rigid policy of bolstering monopolies, maintaining artificial legal barriers and suppressing competition. Let's just say we're taking the fork labelled "To Monopoly." And if that's the way you want to travel, you'll want to support: -- Reaffirming the '84 Cable Act's proscription of telco entry into cable; passing new legislation barring video dialtone; perhaps even moving toward legislation precluding Direct Broadcast Satellite and wireless cable. -- Repealing the program access provisions of the '92 Cable Act. -- Prohibiting by preemption the introduction of competition in local telephone markets by New York State and other states, establishing instead a nationwide policy of monopoly local telephone providers. -- Enshrining the MFJ as the law of the land, but removing any judge's flexibility to lift its restrictions. Those of you who would follow this path -- explicitly or implicitly, intentionally or unwittingly, conditionally or positively -- will have to recognize that consumers buying from monopolies will demand regulation of cable and telephone rates. This would lead to a lifetime of regulation for everyone here and for our children. Lawyers and lobbyists would benefit for the foreseeable future and beyond. And maybe the public will not recognize the substantial but largely hidden costs imposed on the economy by even a regulated monopoly. And, oh, all those who have new ideas to introduce into the communications revolution would have just a few companies to go to for access to the market. If those few don't like the new ideas, you'll be out of luck. I think all of you prefer the road to competition. So the first thing we must do is clear: we should all encourage Congress to act again next year. Everyone in this town is talking about the elections. I say, no matter who wins which elections, it is imperative to support the recommencement of the legislative process. We should all join in saying: The telecommunications reform legislation may be dead. But in the classic hopeful words of Brooklyn Dodgers fans: "Wait Till Next Year." Now in rewriting legislative reform next year as another version of "Back to the Future", we must all join also in articulating by word and deed the value of moving to competition in all communications markets. At the FCC, this must be done in our regulations, our acts of deregulation, policy statements, adjudications, and even in speeches. In the ways we can act to further fair competition and explain its value, we should act. Similarly, Congress will need to explain again its competition policy: hold hearings, have debates and pass legislation. And this explaining needs to be done responsibly by industry and by consumer groups. Living inside the Beltway, I saw so many advertisements about the benefits of competition in long distance markets that I know you know how to promote this commitment to change. Industry carries a particular burden in this job of persuasion. After all, as Kevin Phillips points out in his new book, only 6% of the people believe the President controls the federal government in Washington, basically the same under Bill Clinton as it was under George Bush. Twenty-one percent believe that Congress is in charge. But 57% -- six out of every ten people -- believe that special interests and lobbyists run this town. And you know they're right. The truth is that the raw power in Washington, D.C., is possessed by the 200,000 lawyers, lobbyists and associated employees who ply their trade here. Next, with all these lawyers and lobbyists offering advice, we all should be able to come to the inevitable conclusion, once and for all, that the journey to competition will not be easy. Suggestions that fair competition will be easy to introduce should be treated with the scorn an English labor leader used to use for opening management proposals, "Sure, and we'll all have pie in the sky in the sweet bye and bye." For example, some advocate that competition policy should be based on a sort of regulatory big bang theory -- just set a future date and let competition replace monopoly at that moment. I agree that competition policy needs to be forward - looking and that competition should permit us to radically reduce regulations. However, if we all learned anything in the last year of Congressional deliberation on communications reform, it is that every time you turn over the rock of monopoly in search of the gold of competition, you do find problems underneath. For example, if you just said that as a matter of law in two years all industries would compete, what would you do about interconnection, vertical integration, cross-subsidies, equal access, 1-plus dialing and a host of other issues? All these questions would still require answers. So let's be serious about the scope of the task and about the importance of the details of the issues if we're going to follow the path of competition. Let me give you an example of the hard work. The cable industry has asked the FCC to reject virtually every application that has been filed by telephone companies to offer video dialtone. The filings on this issue have generated a stack of paper nearly 12 feet high, over 33,000 pages. These filings tell us that the telcos are going to come at the cable industry with the ammunition of cross-subsidization, that we have to regulate to ensure fair competition, and that we must rewrite over 200 pages of rules called Parts 32, 36, 61, 64, and 69 so that telcos cannot unfairly use monopoly revenues to subsidize entry into new markets. Somebody said last year that when it comes to the building of the information highway, government can just be a cheerleader on the sidelines. My friends, if cheerleading is what you really want from government, we don't need a 33,000 page instruction book. My point is not that the cable industry arguments are without merit. We are taking them seriously and that is a reason we haven't yet decided the reconsideration of our initial video dialtone decision. But the many comments on VDT prove that introducing competition requires hard thinking. Yet it's thought worth thinking. It's what you want public servants to do. To help in the work of promoting competition, we at the Commission have used three guidelines: choice, opportunity, and fairness. The importance of choice is based on the premise that from at least this day forward, communications products and services are more like any other consumer item than they have ever been before. You remember my friend and predecessor Mark Fowler being quoted as saying that the TV was like a toaster with pictures. Mark, rightly or wrongly, was taken to mean there was no more need for society to worry about TV's content than for anyone to be concerned about whether whole wheat toast or a bagel was in the toaster. I'm not inclined to agree, but I want to use the same analogy but to make a very different point. Rather, I think communications services are like toasters and all other consumer products in that consumers benefit from choice in what is sold to them. Competitive choice improves the quality, lowers the price, intensifies the variety, increases innovation, stimulates economic growth. Competition dispenses with the need for rate regulation of toasters, TV programming, telephone service, and all other consumer products. That is the reason we aspire to create choice on all five lanes of the information highway: cable programming, wireline and wireless telephony, satellite service, and broadcast markets. The second aspect of one policy of competition is opportunity. We favor competition because we favor more opportunity. As an example, let's talk about cable programming. Industry, consumer groups, and the Commission are currently considering what are called cable going forward rules. The principal problem we confront is what the Supreme Court called in the must-carry case the "bottleneck monopoly." In virtually all geographic markets, the cable operator is a monopoly. It has bottleneck market power -- meaning it can limit access to programming, pay less than competitive prices to programmers, and charge higher than competitive prices to consumers. The cable monopolies may have used its profits to build this great coaxial cable network that now passes all homes in the United States. But there are at least two groups that may be treated unfairly because of the bottleneck: consumers and programmers. Consumers face artificially high prices; programmers face restrictions on the ability to reach viewers and artificially low prices for their product. The going forward rules need to help programmers by opening up those restrictions on outputs and helping them obtain a fair price from operators. Operators need a fair return for adding new services to basic or enhanced basic cable -- the two concrete, identifiable bundled products that must be rate regulated under the law while there is no competitive offering of these products. And consumers should under the Cable Act either pay less for the same thing or more for more channels in basic or enhanced basic -- but a lot less than they would pay if the Cable Act weren't the law. So how should all these goals be simultaneously achieved? Our bottom line must be that the operators get incentives to add some new channels -- and in that way the bottleneck will be opened to a degree. But our rules should not permit cable operators to obtain unfair prices from consumers as part of the incentive to add channels to basic or enhanced basic. Nor is it satisfactory to construe the Cable Act to mandate that new channels must be offered a la carte in order to escape rate regulation. That's too inflexible. And we believe we ought to strive for flexibility and clarity in regulation. So that's why we're exploring with industry and consumer groups the concept of a new product tier, a bundle of new services that would not have to be rate regulated, regardless of whether the services are offered a la carte. After all, for many programmers a la carte has no attraction whatsoever. Many new programmers need to be part of a bundled product to attract the viewers needed for advertising support. Nor is the a la carte offerings of otherwise bundled new services necessarily material to any going forward rule if no one subscribes to these a la carte offerings. Another example of applying the principle of opportunity is the Prime Time Access Rule. Here we have a rule which limits competition for certain programming, thereby artificially depressing the price for that programming. Given certain market conditions, that might make sense. But does it make sense to micromanage competition in today's market? Is it good for those sellers of programming to have the opportunity to sell their products only to an artificially limited group? These are important questions that need serious and timely answers. The third aspect of the competition policy is fairness. This is where more hard work is required. We need to have fair competition that works to generate basic social goods. Maybe not everyone needs a toaster but everyone needs affordable electricity to run it. Maybe not everyone needs to watch TV or to talk on the phone a minimum amount of time, but everyone needs affordable phone rates and affordable access to TV to participate in our economy, our society and our public debates. Those special needs are for our children, who need the information highway connected to every classroom in every school in the country. This goal can be very readily achieved by the people in this room working together in efficient, economically sensible collaboration. Now let's look at some of what the competition policy will require all of us to do in each market. First, the local telephone market. We need legislation giving us at the FCC the ability to remove obstacles to competition in local telecommunications markets. Just as phone companies want entry into the video market, we need a national policy to let cable and long distance carriers into the local telephone markets. This is what Chairman Markey very wisely called for again last week in his September 27 speech. But with or without legislation or the voluntary agreement of states to repeal monopoly protection laws, we still need to tackle the extremely difficult problem of making sure that the local telephone companies don't use their market power to keep out wire or wireless competitors. And we need to make sure that universal service is guaranteed anew in light of changing market circumstances. If there need to be subsidies, they should be economically rational, and they should work to meet real needs Next, competition in video. The country deserves legislation that repeals the '84 Cable Act prohibition on telephone company entry into cable markets. But we don't want, as Chairman Markey said recently, to let the telephone companies "gobble up" the cable industry, creating a monopolistic one-wire world. Now we all know there are numerous pending court challenges by the Bell companies to the '84 Act's prohibition. The cases raise First Amendment issues. But the real issue here is not free speech but how to craft a sensible policy for letting telcos into cable, where a flat prohibition is not what anyone favors. So what we need here is legislation and regulation that establishes fair rules of two- wire competition. We also want to encourage competition within cable offerings. That's one aspect of the new product bundle of programs that we've been talking about with the cable programmers. It can be an alternative non-rate regulated choice offered in competition with rate regulated tiers. Next, competition in long distance. We've got 400 long distance carriers, but one still is dominant and we ought to be concerned about the risk of a price umbrella being created in long distance markets. We also are very concerned about increasing the ability of our long distance carriers to compete in closed markets overseas. Is it time for an aggressive policy of reciprocity? Shouldn't Congress act in this area as well? Fourth, we need to apply the competition policy to broadcast. On broadcast issues I believe we need to listen to economists because the future of broadcast is dependent on sensible economic policy. For the lawyers here -- or those who hire lawyers -- and that covers everyone, the most important case for broadcasting is not necessary Red Lion or, as Don West would say, New York Times v. Sullivan. Instead the most important case may be Terminal Railroads. In the 19th century, America's economy depended on the creation of a national transportation system -- the railroads. One of the richest men in the country, Jay Gould, obtained control over the railroads, railroad terminals, ferry boats and bridges in and around St. Louis. Nothing could reach consumers in St. Louis without Gould's say-so. In the Terminal Railroads case, government used the Sherman Act to break up that bottleneck monopoly and let traffic flow freely through that important city. The lesson for broadcasting is clear -- no one should possess a bottleneck that requires one person's say-so before broadcast TV can reach its audience. Broadcasters need say-so free access to consumers. After all, their medium is inherently free as a matter of economics. And the business success of broadcasters should depend primarily on how many viewers a show can gather for the purpose of advertising, not on whether they can persuade cable operators to give them clearance. That's why must-carry is an important concept. It is a necessary check on the power of the bottleneck cable operator. While keeping good economics in mind, we need to figure out how to use the broadcasting medium to society's best advantage. Broadcasting has never been exclusively just for the money. This brings up the question of the social compact. There's been a lot of hype about whether I created, killed, birthed or abandoned this concept. The truth is simple. None of the above. The concept came before I mentioned it and it will, I hope, be around for years. It is the same as the notion that broadcasters have some obligation to perform public service by reason of getting their scarce, free licenses. So what should be the nature of that public service given today's market condition? How can that public service be defined so as to have the greatest impact for the good while minimizing administrative costs and market inefficiencies? Specifically, what is the best way to ensure broadcasting provides children programming opportunities and minorities opportunities in management and in ownership? Good economics and meaningful answers to these questions can be combined to generate sensible rules and sensible de-regulation. We all know that a competition policy will change the way you do business. But it is far easier to change in good times than in bad. And in these times for broadcasting and cable, our challenge is to make the best of a great situation. So I predict if you choose the right path -- the path to the sunny playing fields of fair competitions -- you'll have tremendous contests but greater opportunities for success. You'll have greater flexibility to conduct business, but you'll have clearly defined social responsibilities. Finally, and most important, you'll have regulators demanding less while customers demanding more. In closing let me quote again from Mr. Woody Allen -- "It is clear the future holds great opportunities. It also holds pitfalls. The trick will be to avoid the pitfalls, seize the opportunities, and get home by six o'clock." We at the Commission have abandoned all hope of getting home by six, but we'll do our best to avoid the pitfalls, seize the opportunities and help you keep the communications revolution rolling. Thank you very much.